@Rosalyn2010 wrote:
What qualifies as earned income, because everything I google says if I pay him it is earned income. If I have a T-shirt Business and he helps me with cleaning (janitor) and I pay him $25/month would that count as income?
How do you prove this is wages, rather than a sham transaction to be able to put his allowance into a Roth IRA?
For one thing, the IRS would look at whether you are paying fair market rate. I expect hiring a lawn service to mow your lawn would be $40+ per week. What services are your child actually performing for $25 per month? Is your child actually old enough to materially perform a service for wages (mature enough, physically capable, etc.). Would you hire your neighbor's 9-year old child to perform the same tasks for the same wage, if your son was temporarily disabled, or on vacation?
If you did hire your child to clean up a t-shirt business, for example, you would probably be expected to follow state labor laws including minimum wage and child labor laws. Sometimes those laws don't apply to family, sometimes they do. How does your state labor laws view a 9-year old handling dangerous tools (lawn mower, shears, pesticides, etc.)?
It's much easier with a third party. If the neighbors hire your son to mow the lawn, it's a hands off transaction from your point of view. And you could give him gifts equal to his taxable compensation to deposit in the IRA. And once your child has a job of their own (age 14 or younger, depending on the state and the type of job) you could easily gift your son an amount equal to his wages to put into his IRA.
But for now, this looks like a sham to put an allowance into the Roth. If audited, I think you would have problems.
